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Thread: 13 - Indian Accounting Standard 21 - Earlier Accounting standard (11) - The Effects of Changes in Foreign Exchange Rates

  1. #11
    IND-AS
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    Thumbs up Recognition of exchange differences of Indian Accounting Standard 21-Earlier Accounting standard(11) -The Effects of Changes in Foreign Exchange Rates

    Recognition of exchange differences of Indian Accounting Standard 21 - Earlier Accounting standard (11)

    The Effects of Changes in Foreign Exchange Rates



    Recognition of exchange differences

    27. As noted in paragraph 3 (a) and 5, Ind AS 39 applies to hedge accounting for foreign currency items. The application of hedge accounting requires an entity to account for some exchange differences differently from the treatment of exchange differences required by this Standard. For example , Ind AS 39 requires that exchange differences on monetary items that qualify as hedging instruments in a cash flow hedge are recognised initially in other comprehensive income to the extent that the hedge is effective.

    28. Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements shall be recognised in profit or loss in the period in which they arise, except:

    (i) exchange differences arising on a monetary item that forms part of a reporting entity’s net investment in a foreign operation as described in paragraph 32;
    (ii) where an entity exercises the option provided in paragraph 29A in respect of long-term monetary items.

    29. When monetary items arise from a foreign currency transaction and there is a change in the exchange rate between the transaction date and the date of settlement, an exchange difference results. When the transaction is settled within the same accounting period as that in which it occurred, all the exchange difference is recognised in that period. However, when the transaction is settled in a subsequent accounting period, the exchange difference recognised in each period up to the date of settlement is determined by the change in exchange rates during each period. Paragraph 29A provides an option to recognise unrealised exchange differences arising on translation of certain long -term monetary assets and long-term monetary liabilities from foreign currency to functional currency.

    29A. An entity may exercise the option in respect of recognition of exchange differences arising on translation of long -term monetary items from foreign currency to functional currency as follows:

    (i) Unrealised exchange differences arising on long -term monetary assets and long-term-term monetary liabilities denominated in a foreign currency shall be recognised directly in equity and accumulated in a separate component of equity. The amount so accumulated shall be transferred to profit or loss over the period of maturity of such long -term monetary items in an appropriate manner. The separate component of equity shall be distinguished from any other component of equity representing any other exchange difference recognised in other comprehensive income and accumulated in equity.

    (ii) The option provided in paragraph 29A(i) is not available for the long-term monetary assets and long-term monetary liabilities during the period they are classified as at fair value through profit or loss in accordance with Ind AS 39, either because they are held for trading or because of their designation as at fair value through profit or loss.

    (iii) The option provided in paragraph 29A(i) shall be exercised for the first time when the exchange difference arising on a long -term monetary asset or a long-term monetary liability mentioned in paragraph 29A(i) is recognised. The option, once exercised, shall be irrevocable and shall be exercised in respect of all the long-term monetary assets and long-term monetary liabilities mentioned in paragraph 29A(i).

    (iv) The provisions of paragraphs 48, 48A, 48B, 48C, 48D and 49 shall, so far as relevant, apply in relation to accumulated exchange differences accounted for in accordance with paragraph 29A , except that reference to reclassification from equity to profit or loss wherever appearing in those paragraphs shall be construed as transfer to profit or loss in respect of exchange differences mentioned in paragraph 29A(i).

    (v) For the purpose of paragraph 29A, a monetary asset or a monetary liability shall be treated as long-term, if that asset or liability has a maturity period of twelve months or more from the date of the initial recognition of that asset or liability.

    30. When a gain or loss on a non-monetary item is recognised in other comprehensive income, any exchange component of that gain or loss shall be recognised in other comprehensive income. Conversely, when a gain or loss on a non-monetary item is recognised in profit or loss, any exchange component of that gain or loss shall be recognised in profit or loss.

    31. Other Indian Accounting Standards require some gains and losses to be recognised in other comprehensive income. For example , Ind AS 16 requires some gains and losses arising on a revaluation of property, plant and equipment to be recognised in other comprehensive income. When such an asset is measured in a foreign currency, paragraph 23(c) of this Standard requires the revalued amount to be translated using the rate at the date the value is determined, resulting in an exchange difference that is also recognised in other comprehensive income.

    32. Exchange differences arising on a monetary item that forms part of a reporting entity’s net investment in a foreign operation (see paragraph 15) shall be recognised in profit or loss in the separate financial statements of the reporting entity or the individual financial statements of the foreign operation, as appropriate. In the financial statements that include the foreign operation and the reporting entity (eg consolidated financial statements when the foreign operation is a subsidiary), such exchange differences shall be recognised initially in other comprehensive income and reclassified from equity to profit or loss on disposal of the net investment in accordance with paragraph 48.

    33. When a monetary item forms part of a reporting entity’s net investment in a foreign operation and is denominated in the functional currency of the reporting entity, an exchange difference arises in the foreign operation’s individual financial statements in accordance with paragraph 28. If such an item is den ominated in the functional currency of the foreign operation, an exchange difference arises in the reporting entity’s separate financial statements in accordance with paragraph 28. If such an item is denominated in a currency other than the functional currency of either the reporting entity or the foreign operation, an exchange difference arises in the reporting entity’s separate financial statements and in the foreign operation’s individual financial statements in accordance with paragraph 28. Such exchange differences are recognised in other comprehensive income in the financial statements that include the foreign operation and the reporting entity (ie financial statements in which the foreign operation is consolidated, proportionately consolidated or accounted for using the equity method).

    34. When an entity keeps its books and records in a currency other than its functional currency, at the time the entity prepares its financial statements all amounts are translated into the functional currency in accordance with paragraphs 20–26. This produces the same amounts in the functional currency as would have occurred had the items been recorded initially in the functional currency. For example, monetary items are translated into the functional currency using the closing rate, and non-monetary items that are measured on a historical cost basis are translated using the exchange rate at the date of the transaction that resulted in their recognition.


  2. #12
    IND-AS
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    Thumbs up Change in functional currency of Indian Accounting Standard 21 - Earlier Accounting standard (11) - The Effects of Changes in Foreign Exchange Rates

    Change in functional currency of Indian Accounting Standard 21 - Earlier Accounting standard (11)

    The Effects of Changes in Foreign Exchange Rates



    Change in functional currency

    35. When there is a change in an entity’s functional currency, the entity shall apply the translation procedures applicable to the new functional currency prospectively from the date of the change.

    36. As noted in paragraph 13, the functional currency of an entity reflects the underlying transactions, events and conditions that are relevant to the entity. Accordingly, once the functional currency is determined, it can be changed only if there is a change to those underlying transactions, events and conditions. For example, a change in the currency that mainly influences the sales prices of goods and services may lead to a change in an entity’s functional currency.

    37. The effect of a change in functional currency is accounted for prospectively. In other words, an entity translates all items into the new functional currency using the exchange rate at the date of the change. The resulting translated amounts for non-monetary items are treated as their historical cost. Exchange differences arising from the translation of a foreign operation previously recognised in other comprehensive income in accordance with paragraphs 32 and 39(c) are not reclassified from equity to profit or loss until the disposal of the operation. When the option provided in paragraph 29A is exercised, exchange differences previously recognised directly in equity and accumulated in a separate component of equity in accordance with that paragraph are not transferred to profit or loss immediately on change of the entity's functional currency. They shall continue to be transferred to profit or loss in the manner stated in that paragraph.


  3. #13
    IND-AS
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    Thumbs up Use of a presentation currency other than the functional currency of Indian Accounting Standard 21 - Earlier Accounting standard (11)

    Use of a presentation currency other than the functional currency of Indian Accounting Standard 21 - Earlier Accounting standard (11)

    The Effects of Changes in Foreign Exchange Rates



    Use of a presentation currency other than the functional currency

    Translation to the presentation currency


    38. An entity may present its financial statements in any currency (or currencies). If the presentation currency differs from the entity’s functional currency, it translates its results and financial position into the presentation currency. For example, when a group contains individual entities with different functional currencies, the results and financial position of each entity are expressed in a common currency so that consolidated financial statements may be presented.

    39. The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures:

    (a) assets and liabilities for each balance sheet presented (ie including comparatives) shall be translated at the closing rate at the date of that balance sheet;

    (b) income and expenses for each statement of profit and loss presented (ie including comparatives) shall be translated at exchange rates at the dates of the transactions; and
    (c) all resulting exchange differences shall be recognised in other comprehensive income.

    40. For practical reasons, a rate that approximates the exchange rates at the dates of the transactions, for example an average rate for the period, is often used to translate income and expense items. However, if exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate.

    41. The exchange differences referred to in paragraph 39(c) result from:

    (a) translating income and expenses at the exchange rates at the dates of the transactions and assets and liabilities at the closing rate.
    (b) translating the opening net assets at a closing rate that differs from the previous closing rate.

    These exchange differences are not recognised in profit or loss because the changes in exchange rates have little or no direct effect on the present and future cash flows from operations. The cumulative amount of the exchange differences is presented in a separate component of equity until disposal of the foreign operation. When the exchange differences relate to a foreign operation that is consolidated but not wholly-owned, accumulated exchange differences arising from translation and attributable to non-controlling interests are allocated to, and recognised as part of, non-controlling interests in the consolidated balance sheet.

    42. The results and financial position of an entity whose functional currency is the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures:

    (a) all amounts (ie assets, liabilities, equity items, income and expenses, including comparatives) shall be translated at the closing rate at the date of the most recent balance sheet, except that

    (b) when amounts are translated into the currency of a non - hyperinflationary economy, comparative amounts shall be those that were presented as current year amounts in the relevant prior year financial statements (ie not adjusted for subsequent changes in the price level or subsequent changes in exchange rates).

    43. When an entity’s functional currency is the currency of a hyperinflationary economy, the entity shall restate its financial statements in accordance with Ind AS 29 before applying the translation method set out in paragraph 42, except for comparative amounts that are translated into a currency of a non-hyperinflationary economy (see paragraph 42(b)). When the economy ceases to be hyperinflationary and the entity no longer restates its financial statements in accordance with Ind AS 29, it shall use as the historical costs for translation into the presentation currency the amounts restated to the price level at the date the entity ceased restating its financial statements.


  4. #14
    IND-AS
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    Thumbs up Translation of a foreign operation of Indian Accounting Standard 21 - Earlier Accounting standard (11)

    Translation of a foreign operation of Indian Accounting Standard 21 - Earlier Accounting standard (11)

    The Effects of Changes in Foreign Exchange Rates



    Translation of a foreign operation

    44. Paragraphs 45–47, in addition to paragraphs 38–43, apply when the results and financial position of a foreign operation are translated into a presentation currency so that the foreign operation can be included in the financial statements of the reporting entity by consolidation, proportionate consolidation or the equity method.

    45. The incorporation of the results and financial position o f a foreign operation with those of the reporting entity follows normal consolidation procedures, such as the elimination of intragroup balances and intragroup transactions of a subsidiary (see Ind AS 27 and Ind AS 31 Interests in Joint Ventures). However, an intragroup monetary asset (or liability), whether short -term or long-term, cannot be eliminated against the corresponding intragroup liability (or asset) without showing the results of currency fluctuations in the consolidated financial statements. This is because the monetary item represents a commitment to convert one currency into another and exposes the reporting entity to a gain or loss through currency fluctuations. Accordingly, in the consolidated financial statements of the reporting entity, s uch an exchange difference is recognised in profit or loss or, if it arises from the circumstances described in paragraph 32, it is recognised in other comprehensive income and accumulated in a separate component of equity until the disposal of the foreign operation. When the option provided in paragraph 29A is exercised, in the consolidated financial statements of the reporting entity, such an exchange difference is directly recognised in equity and disposed of in the manner prescribed in that paragraph.

    46. When the financial statements of a foreign operation are as of a date different from that of the reporting entity, the foreign operation often prepares additional statements as of the same date as the reporting entity’s financial statements. When this is not done, Ind AS 27 allows the use of a different date provided that the difference is no greater than three months and adjustments are made for the effects of any significant transactions or other events that occur between the different dates. In such a case, the assets and liabilities of the foreign operation are translated at the exchange rate at the end of the reporting period of the foreign operation. Adjustments are made for significant changes in exchange rates up to the end of the reporting period of the reporting entity in accordance with Ind AS 27. The same approach is used in applying the equity method to associates and joint ventures and in applying proportionate consolidation to joint ventures in accordance with Ind AS 28 Investments in Associates and Ind AS 31.

    47. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation shall be treated as assets and liabilities of the foreign operation. Thus they shall be expressed in the functional currency of the foreign operation and shall be translated at the closing rate in accordance with paragraphs 39 and 42.


  5. #15
    IND-AS
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    Thumbs up Disposal or partial disposal of a foreign operation of Indian Accounting Standard 21 - Earlier Accounting standard (11)

    Disposal or partial disposal of a foreign operation of Indian Accounting Standard 21 - Earlier Accounting standard (11)

    The Effects of Changes in Foreign Exchange Rates



    Disposal or partial disposal of a foreign operation

    48. On the disposal of a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation, recognised in other comprehensive income and accumulated in the separate component of equity, shall be reclassified from equity to pro fit or loss (as a reclassification adjustment) when the gain or loss on disposal is recognised (see Ind AS 1 Presentation of Financial Statements).

    48A. In addition to the disposal of an entity’s entire interest in a foreign operation, the following are accounted for as disposals even if the entity retains an interest in the former subsidiary, associate or jointly controlled entity:

    (a) the loss of control of a subsidiary that includes a foreign operation;
    (b) the loss of significant influence over an associate that includes a foreign operation; and
    (c) the loss of joint control over a jointly controlled entity that includes a foreign operation.

    48B. On disposal of a subsidiary that includes a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation that have been attributed to the non-controlling interests shall be derecognised, but shall not be reclassified to profit or loss.

    48C. On the partial disposal of a subsidiary that includes a foreign operation, the entity shall re-attribute the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensive income to the non-controlling interests in that foreign operation. In any other partial disposal of a foreign operation the entity shall reclassify to profit or loss only the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensive income.

    48D. A partial disposal of an entity’s interest in a foreign operation is any reduction in an entity’s ownership interest in a foreign operation, except those reductions in paragraph 48A that are accounted for as disposals.

    49. An entity may dispose or partially dispose of its interest in a foreign operation through sale, liquidation, repayment of shar e capital or abandonment of all, or part of, that entity. A write-down of the carrying amount of a foreign operation, either because of its own losses or because of an impairment recognised by the investor, does not constitute a partial disposal. According ly, no part of the foreign exchange gain or loss recognised in other comprehensive income is reclassified to profit or loss at the time of a write -down.


  6. #16
    IND-AS
    Guest

    Thumbs up Tax effects of all exchange differences of Indian Accounting Standard 21 - Earlier Accounting standard (11)

    Tax effects of all exchange differences of Indian Accounting Standard 21 - Earlier Accounting standard (11)

    The Effects of Changes in Foreign Exchange Rates


    Tax effects of all exchange differences

    50. Gains and losses on foreign currency transactions and exchange differences arising on translating the results and financial position of an entity (including a foreign operation) into a different currency may have tax effects. Ind AS 12 Income Taxes applies to these tax effects.


  7. #17
    IND-AS
    Guest

    Thumbs up Disclosure of Indian Accounting Standard 21 - Earlier Accounting standard (11) - The Effects of Changes in Foreign Exchange Rates

    Disclosure of Indian Accounting Standard 21 - Earlier Accounting standard (11)

    The Effects of Changes in Foreign Exchange Rates



    Disclosure

    51. In paragraphs 53 and 55–57 references to ‘functional currency’ apply, in the case of a group, to the functional currency of the parent.

    52. An entity shall disclose:

    (a) the amount of exchange differences recognised in profit or loss except for those arising on financial instrument s measured at fair value through profit or loss in accordance with Ind AS 39;
    (b) net exchange differences recognised in other comprehensive income and accumulated in a separate component of equity, and a reconciliation of the amount of such exchange differ ences at the beginning and end of the period; and
    (c) net exchange differences recognised directly in equity and accumulated in a separate component of equity in accordance with paragraph 29A,and a reconciliation of the amount of such exchange differences at the beginning and end of the period.

    53. When the presentation currency is different from the functional currency, that fact shall be stated, together with disclosure of the functional currency and the reason for using a different presentation currency.

    54. When there is a change in the functional currency of either the reporting entity or a significant foreign operation, that fact and the reason for the change in functional currency shall be disclosed.

    55. When an entity presents its financial statements in a currency that is different from its functional currency, it shall describe the financial statements as complying with Indian Accounting Standards only if they comply with all the requirements of each applicable Standard including the translation method set out in paragraphs 39 and 42.

    56. An entity sometimes presents its financial statements or other financial information in a currency that is not its functional currency without meeting the requirements of paragraph 55. For example, an entity may convert into another currency only selected items from its financial statements. Or, an entity whose functional currency is not the currency of a hyperinflationary economy may convert the financial statements into another currency by translating all items at the most recent closing rate. Such conversions are not in accordance with Indian Accounting Standards and the disclosures set out in paragraph 57 are required.

    57. When an entity displays its financial statements or other financial information in a currency that is differ ent from either its functional currency or its presentation currency and the requirements of paragraph 55 are not met, it shall:

    (a) clearly identify the information as supplementary information to distinguish it from the information that complies with Indian Accounting Standards;
    (b) disclose the currency in which the supplementary information is displayed; and
    (c) disclose the entity’s functional currency and the method of translation used to determine the supplementary information.


  8. #18
    IND-AS
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    Thumbs up Appendix - A of Indian Accounting Standard 21 - Earlier Accounting standard (11) - The Effects of Changes in Foreign Exchange Rates

    Appendix - A of Indian Accounting Standard 21 - Earlier Accounting standard (11)

    The Effects of Changes in Foreign Exchange Rates


    Appendix - A


    References to matters contained in other Indian Accounting Standards

    This Appendix is an integral part of Indian Accounting Standard 21

    This appendix lists the appendix which is a part of another Indian Accounting Standard and makes reference to Ind AS 21, The Effects of Changes in Foreign Exchange Rates.

    1. Appendix D Hedges of a Net Investment in a Foreign Operation contained in Ind AS 39, Financial instruments: Recognition and Measurement makes reference to this Standard also.


  9. #19
    IND-AS
    Guest

    Thumbs up Appendix - 1 of Indian Accounting Standard 21 - Earlier Accounting standard (11) - The Effects of Changes in Foreign Exchange Rates

    Appendix - 1 of Indian Accounting Standard 21 - Earlier Accounting standard (11)

    The Effects of Changes in Foreign Exchange Rates


    Appendix - 1


    Note: This Appendix is not a part of the Indian Accounting Standard. The purpose of this Appendix is only to bring out the differences between Indian Accounting Standard (Ind AS) 21 and the corresponding International Accounting Standard (IAS) 21, The Effects of Changes in Foreign Exchange Rates.

    Comparison with IAS 21, The Effects of Changes in Foreign Exchange Rates

    1. The transitional provisions given in IAS 21 have not been given in the Ind AS 21, since all transitional provisions related to Indian A Ss, wherever considered appropriate, have been included in Ind AS 101, First-time Adoption of Indian Accounting Standards corresponding to IFRS 1, First-time Adoption of International Financial Reporting Standards.

    2. Ind AS 21 permits an option to recognise exchange differences arising on translation of certain long-term monetary items from foreign currency to functional currency directly in equity. In this situation, Ind AS 21 requires the accumulated exchange differences to be transferred to profit or loss in an appropriate man ner. IAS 21 does not permit such a treatment.

    3. Consequent to the optional treatment prescribed for some exchange differences (as mentioned in 2 above), an additional disclosure has been added in paragraph 52 of Ind AS 21.

    4. Different terminology is used in this Standard e.g., the term ‘balance sheet’ is used instead of ‘Statement of financial position’.



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